New York, March 17, 2020 -- Moody's Investors Service ("Moody's") placed its ratings for Delta Air Lines, Inc. ("Delta") -- including the company's Baa3 senior unsecured rating -- on review for downgrade.
The rapid and widening spread of the coronavirus outbreak, the deteriorating global economic outlook, falling oil prices and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. The passenger airline sector has been one of the sectors most significantly affected by the shock given its exposure to travel restrictions and sensitivity to consumer demand and sentiment. Moody's regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety. Today's actions reflect the impact on Delta of the breadth and severity of the shock, the broad deterioration in credit quality it has triggered, and high-level lingering uncertainty.
The review for downgrade reflects Moody's concerns that the coronavirus will significantly curtail US domestic and global demand for air travel through at least June. For now, Moody's assumes a measured pace of recovery in demand commencing in the third quarter. Moody's anticipates that the accelerating incidence of the coronavirus across the US will lead to further capacity reductions across the industry and, potentially, a temporary restriction on passenger air services, both domestically and to and from additional foreign countries. Moody's current assumption is that domestic industry capacity in the US is cut by 50% in the second quarter and 25% in the third quarter relative to the respective quarters in 2019. For the three US global carriers, Moody's assumes capacity on international routes will shrink by 90% or more in the second quarter and a slower recovery than for domestic traffic following the virus' decline. Moody's assumes Delta's full year capacity would reduce by about 35%. However, there are high risks of more challenging downside scenarios, and the severity and duration of the pandemic and travel restrictions are highly uncertain.
During its review, Moody's will consider (i) the evolution of the company's liquidity profile in upcoming days and weeks, including new funding sources to bolster its cash position; (ii) Delta's ability to timely and, in what magnitude, aggressively reduce expenses and capital investments to reduce cash outflows as new booking levels recede; (iii) evolving market conditions, including demand patterns and additional capacity cuts; (iv) the potential for and types of support the US government might provide to US airlines; and (v) the potential to timely restore key credit metrics and a stronger cash buffer following the coronavirus, both of which will require prioritization of debt reduction over share repurchases.
LIQUIDITY
Moody's anticipates that Delta will soon announce actions to bolster its cash position. The company had entered 2020 with about $2.9 billion of cash, relying on its $3.2 billion of committed revolving credit facilities that do not require a representation of no material adverse change to borrow as a back-up to its normal liquidity needs. Moody's estimates that cash on hand is presently near $1 billion, following the payment of about $1.6 billion of profit sharing in February 2020 and the current decline in bookings.
RATINGS RATIONALE
Delta's Baa3 senior unsecured rating reflects its historically supportive financial leverage and strong business profile as the world's largest airline with leading, recurring free cash flow. Delta's business profile -- defined by its brand, global network, leading airline operating performance and operating partnership model -- is strong and should provide a solid foundation for eventual recovery from the coronavirus. However, the company's modest cash position is a meaningful factor in the rating profile.
The ratings could be downgraded if the company does not quickly increase its cash position to above $4 billion, which Moody's anticipates is forthcoming. Additional downward ratings pressure would result from (i) a longer-running decline in passenger bookings beyond the second quarter of 2020, or a slower pace of recovery come the third quarter of 2020 as a result of the coronavirus outbreak, particularly if not matched by further additional sources of liquidity; (ii) greater liquidity pressure from an inability to remove costs and cut capital spending; and/or (iii) if there are clear expectations that Delta will not be able to timely restore its financial profile once the virus recedes (for example, if debt-to-EBITDA is sustained above 3.25x or FFO plus interest-to-interest is sustained below 6x).
There will be no upwards pressure on the ratings until after passenger demand returns to pre-coronavirus levels. The ratings could be raised if Delta maintains cash above $4 billion and improves its key credit metrics, including debt-to-EBITDA below 2.5x, funds from operations plus interest-to-interest above 8x or EBITDA margins near 20%.
The methodologies used in these ratings were Passenger Airline Industry published in April 2018 and Enhanced Equipment Trust and Equipment Trust Certificates published in July 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.
Headquartered in Atlanta, Georgia, Delta Air Lines, Inc. and the Delta Connection carriers offer passenger air travel services to over 300 destinations in more than 50 countries and six continents. Delta reported $47 billion of revenue for 2019.
On Review for Downgrade:
..Issuer: Clayton County Development Authority, GA
....Senior Unsecured Revenue Bonds, Placed on Review for Downgrade, currently Baa3
..Issuer: Delta Air Lines, Inc.
....Senior Secured Bank Credit Facility, Placed on Review for Downgrade, currently Baa1
....Senior Unsecured Regular Bond/Debenture, Placed on Review for Downgrade, currently Baa3
....Senior Secured Enhanced Equipment Trust, Series 2007-1 Class A, Placed on Review for Downgrade, currently A3
....Senior Secured Enhanced Equipment Trust, Series 2007-1 Class B, Placed on Review for Downgrade, currently Baa2
....Senior Secured Enhanced Equipment Trust, Series 2012-1 Class A, Placed on Review for Downgrade, currently A2
....Senior Secured Enhanced Equipment Trust, Series 2015-1 Class A, Placed on Review for Downgrade, currently A1
....Senior Secured Enhanced Equipment Trust, Series 2015-1 Class AA, Placed on Review for Downgrade, currently Aa2
....Senior Secured Enhanced Equipment Trust, Series 2015-1 Class B, Placed on Review for Downgrade, currently Baa1
....Senior Secured Enhanced Equipment Trust, Series 2019-1 Class A, Placed on Review for Downgrade, currently A3
....Senior Secured Enhanced Equipment Trust, Series 2019-1 Class AA, Placed on Review for Downgrade, currently Aa3
....Senior Secured Enhanced Equipment Trust, Series 2020-1 Class AA, Placed on Review for Downgrade, currently Aa3
....Senior Secured Enhanced Equipment Trust, Series 2020-1 Class A, Placed on Review for Downgrade, currently A3
..Issuer: Delta Air Lines, Inc. (Old) (debts assumed by Delta Air Lines, Inc.)
....Senior Secured Enhanced Equipment Trust, Series 2002-1 Class G1, Placed on Review for Downgrade, currently Baa1
....Underlying Senior Secured Enhanced Equipment Trust, Series 2002-1 Class G1, Placed on Review for Downgrade, currently Baa1
..Issuer: New York Transportation Develop. Corp., NY
....Senior Unsecured Revenue Bonds, Placed on Review for Downgrade, currently Baa3
..Issuer: Northwest Airlines, Inc. (debts assumed by Delta Air Lines, Inc.)
....Senior Secured Enhanced Equipment Trust, Series 2002-1 Class G2, Placed on Review for Downgrade, currently Baa1
....Underlying Senior Secured Enhanced Equipment Trust, Series 2002-1 Class G2, Placed on Review for Downgrade, currently Baa1
Outlook Actions:
..Issuer: Delta Air Lines, Inc.
....Outlook, Changed To Rating Under Review From Positive